Olympic Diplomacy: Don't Fear China

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There would be plenty of buyers for these assets, so their overall value would not suffer. But the sellers would lose big time because they would effectively be giving away free money. (China has lately started diversifying its reserves into euros and other currencies as they strengthen against the dollar, but that's to maximize the returns on its investments, not out of political spite against the U.S.)

Furthermore, to the extent that Chinese authorities do slow the American economy, they would make the U.S. less capable of absorbing China's exports. This would have major political reverberations, given that America is China's biggest export market. Indeed, Chinese workers making, say, toys for Wal-Mart (WMT) will not simply sit by quietly while their jobs vanish.

The truth is that opening the U.S. to Chinese investments and exports has given China an enormous stake in America's economic health. In fact, last year, when statements by a Chinese academic triggered rumors that a China dollar dump was imminent, Chinese officials quickly issued a statement that "China doesn't want any undesirable phenomenon in the global financial order."

Desperate for International Respectability

What's ironic is that China worrywarts who have long complained that China deliberately undervalues the yuan to discourage U.S. exports are now concerned about the opposite: China shedding its dollar reserves, even though the net effect of this would be to raise the value of the yuan against the dollar, precisely as they want.

None of this is to suggest that the U.S. should sit back and do nothing to hasten China's political liberalization. Indeed, the Olympics offer America and other Western countries an important opportunity to coax better behavior from China. The very fact that China wanted so badly to host the Games and has gone to the trouble of orchestrating the elaborate intercontinental relay of the Olympic torch suggests how desperate it is for international respectability. The last thing China wants is a massive showdown with protesters during the festivities.

Indeed, the Olympics offers powerful testimony, not to the clout that economic engagement has given China over the U.S., but the reverse: the clout that the U.S. and the international community have acquired over the mainland. It is significant that Beijing recently held talks with a representative of the Dalai Lama. It is highly unlikely that this will produce any major political breakthroughs overnight. Beijing after all is performing a double-dance—simultaneously trying to mollify the international community while averting a nationalistic backlash at home that too many concessions would likely trigger.

An Argument for Soft Diplomacy

Given this backdrop, there is an argument for the kind of soft diplomacy that President Bush is pursuing, as opposed to the threats and boycotts that human rights advocates and European leaders are advocating. However, if as the Games approach this strategy fails to yield sufficient progress, President Bush would be entirely justified in taking a harder line and even canceling his Olympic sojourn. This would make a far bigger political statement than refusing to attend now. But if President Bush does decline to attend the Games, he should do so without fearing an economic backlash: China would have everything to lose by pulling the trigger, and the U.S. not so much.

Shikha Dalmia is a senior analyst at Reason Foundation, a Los Angeles-based free market think tank. She writes frequently about trade and immigration issues for Reason magazine and numerous other publications.